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Finance Dictionary and Glossary of Investment Terms
underwater
Definition 1.
A call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security. Thus, there is no incentive to exercise the option today. However, the option still has "time value", value based on the fact that the prices of the underlier can change. This "time value" diminishes as the option approaches maturity.
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Definition 2.
1. The condition a call option is in when its strike price is higher than the market price of the underlying stock. 2. The condition a put option is in when its strike price is lower than the market price of the underlying stock. Also known as "out of the money."
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